Thursday, 13 September 2012

SNB Will Maintain Franc Defense as It Keeps Ceiling on Hold

The Swiss central bank pledged to uphold its yearlong defense of the franc by purchasing foreign currencies in “unlimited quantities” as it cut its inflation and economic growth forecasts.

The Swiss National Bank (SNBN), led by President Thomas Jordan, today maintained the currency ceiling at 1.20 francs per euro and reiterated that it will uphold the measure “with the utmost determination.” The Zurich-based central bank also kept its benchmark interest rate at zero percent, as forecast by all 16 economists in a Bloomberg News survey.

Swiss central bank President Thomas Jordan said in a speech on Sept. 3 that any gain in the franc would pose a “very substantial threat” to the economy and spark the risk of “deflationary developments.”. Photographer: Gianluca Colla/Bloomberg

The SNB’s foreign-currency reserves increased 64 percent to 418 billion francs ($446 billion) in the year through August as policy makers stepped up euro purchases to stave off attacks spurred by the region’s turmoil. With the economy faltering and consumer prices posting annual declines for almost a year, the central bank will maintain the cap into 2013, economists at UBS AG, Julius Baer Group Ltd. (BAER) and Credit Suisse Group AG said.

“The franc could appreciate massively if the SNB dropped its ceiling and they will keep it on hold for the foreseeable future,” said Maxime Botteron, an economist at Credit Suisse in Zurich. “I expect currency purchases to continue to decrease if tensions on the financial markets diminish further.”

The Swiss franc, which is seen as a haven in times of global turmoil, traded at 1.2109 versus the euro at 10:09 a.m. in Zurich. It was at 93.75 centimes versus the dollar.

Inflation Projections

In their inflation projections, policy makers forecast consumer prices to fall 0.6 percent this year before increasing 0.2 percent in 2013 and 0.4 percent in 2014. In June, they had seen prices declining 0.5 percent in 2012, followed by gains of 0.3 percent and 0.6 percent, respectively.

There is “no threat of inflation” in the “foreseeable future,” the SNB said in a statement. It also cut its 2012 growth forecast to 1 percent from a June projection of about 1.5 percent, saying that downside risks to the economy will remain high “in the near term.”

“The franc is still high and is weighing on the Swiss economy,” the central bank said. “For this reason, the SNB will not permit an appreciation of the franc, given the serious impact this would have on both prices and economic performance. If necessary, it stands ready to take further measures at any time.”

Franc Surge

The SNB’s three board members -- Jordan, Jean-Pierre Danthine and Fritz Zurbruegg -- won’t hold a briefing after today’s meeting.

Zurbruegg joined the SNB last month, completing the board after Philipp Hildebrand’s departure had left it with just two members. The 52-year-old had previously overseen the state budget as head of the Federal Finance Administration in Bern. From 1998 to 2006, he was senior adviser and executive director for Switzerland at the International Monetary Fund.

The SNB introduced the franc ceiling on Sept. 6, 2011, after the Swiss currency’s surge to near parity with the euro sparked deflation threats.

“Any increase of the ceiling would be too risky,” said David Kohl, deputy chief economist at Julius Baer in Frankfurt. “It’s possible that we’ll see renewed pressure on the franc. They have to stay vigilant even if there’s less of a risk of them having to maintain their pace of currency purchases.”

Euro Holdings

While the franc breached the ceiling just once in April, decreasing import costs have pushed down consumer prices. Jordan said in a speech on Sept. 3 that any gain in the franc would spark the risk of “deflationary developments.”

To protect the economy, policy makers have been forced to pile up foreign-currency holdings amounting to about 73 percent of gross domestic product. Euros accounted for 60 percent of total reserves at the end of the second quarter, up from 52 percent in the previous three months.

Pressure on the ceiling eased over the past month, after the European Central Bank pledged on Aug. 2 to purchase government bonds of distressed nations such as Spain and Italy in tandem with Europe’s rescue fund to fight the turmoil. The Swiss franc weakened 0.8 percent last week, touching an almost eight-month low of 1.2155 per euro, after ECB President Mario Draghioutlined details of the bond-purchasing plan.

Morgan Stanley (MS) last month revised its year-end forecast for the franc to 1.20 per euro from 1.10, leaving JPMorgan Chase & Co. (JPM), Maybank and Hamilton Court FX LLP as the only banks forecasting a breach of the cap in 2012, according to the data compiled by Bloomberg. Alessandro Bee, an economist at Bank Sarasin in Zurich, wrote in an e-mailed note that “fears of a euro breakup have abated a bit” after the ECB’s decision.

‘Crisis Mode’

Still, with the euro region’s economic slump deepening and at least five member statesincluding Italy and Spain in recessions, the Swiss economy may struggle to regain strength after shrinking 0.1 percent in the second quarter. Manufacturing output contracted for a fifth straight month in August and exports declined in July.

The BAK Basel economic institute cut its 2012 and 2013 forecasts on Sept. 11, saying it expects the SNB to keep borrowing costs on hold “for a prolonged period of time,” with the franc remaining close to 1.20 in 2013.

Reto Huenerwadel, an economist at UBS in Zurich, said the SNB will maintain its franc ceiling “for some time.”

“This was another ‘crisis mode’ monetary policy meeting,” said Julien Manceaux, an economist at ING Group in Brussels. “The floor has indeed been tested continously by the market during the last few months. For the moment, there is no reason to believe that the floor could be broken.”

To contact the reporter on this story: Simone Meier in Zurich at smeier@bloomberg.net